De-risking Smallholder Farmers from Climate-induced Risks across Agricultural Commercialization Clusters

Agriculture is essential for Ethiopia’s economy, contributing significantly to its GDP (32.6%). Smallholder farmers, who produce almost 95% of agricultural output, face significant challenges from climate change and variability such as irregular rainfall, temperature rises and pests. These issues reduce farm productivity, leading to food insecurity, income fluctuations, and slower economic growth. Enhancing resilience to climate change and variability risks is essential for improving productivity among smallholder farmers. However, their efforts are hampered by limited access to financial services, particularly credit and agricultural insurance. This restricts their ability to invest in climate-resilient and de-risking practices, leaving them vulnerable to climate risks.

To address these challenges, the Alliance of Bioversity International and CIAT, the Ethiopian Agricultural Transformation Institute (ATI) and Lersha are developing an innovative climate-smart credit-scoring tool.  This tool aims to enhance smallholder farmers’ access to credit and de-risk them through climate adaptation measures across Agricultural Commercialization Clusters (ACC) in Ethiopia. The innovative approach quantifies the risk reduction achieved through adaptation mechanisms, reflecting these efforts in farmers’ credit ratings. This reduces risk in the financial and insurance sectors and encourages private investment through climate-smart credit scoring.

In alignment with these goals, a stakeholder consultation workshop was held on July 15, 2024, in Addis Ababa to advance the development of a climate-smart credit scoring tool. The workshop convened key stakeholders from the agricultural, financial, NGO, private, and research sectors to initiate the creation of this tool. The primary objectives were to foster collaboration, facilitate knowledge sharing, and ensure the tool’s effectiveness and relevance within the Ethiopian context.

This initiative represents a significant stride toward empowering farmers and promoting sustainable agricultural practices amidst climate change challenges, while exploring the integration of adaptation strategies into farmer credit-scoring systems.

The development of this climate-smart credit-scoring tool is a crucial element of the Ukama Ustawi (UU) Initiative, which seeks to bolster resilience in agricultural ecosystems across East and Southern Africa. In Ethiopia, this initiative focuses on refining smallholder farmers’ existing credit-scoring model by providing innovative opportunities for inclusive finance and insurance solutions. These are complemented by agro-climatic advisory services designed to enhance smallholder farmers’ resilience and adaptive capacity. Furthermore, this tool supports the Agricultural Commercialization Cluster (ACC) initiative by integrating climate-resilient agricultural practices across the ACC woredas (districts). The tool addresses the critical challenge of financial access, promoting the adoption of essential agricultural inputs and implementing effective measures to mitigate climate change impacts.

“Even though we are not totally responsible for causing it, we are exposed to climate risks, and therefore we need to de-risk and commercialize agriculture to enable rural transformation that is centered around smallholder farmers and supported by insurance, finance and private investment.”